Notes for a different economic and social system

The world is undergoing a period of great change. The World War II victors polarized the world between a Marxist-Leninist recipe and a Ricardian liberal recipe. Such dualism is still presented as if there are no other options, a kind of global bipartisanship. Both systems failed. It's time to look at other schools of economic thought and policy, to set a new course.

The Soviet Union socialist version began to go wrong when Leonid Brezhnev’s government (1968-1982) increased the budget of the military industries at the expense of the rest of the economy and of social welfare. His government also got involved in an Afghan war that could not be won. The adversary was equipped, trained and financed by the United States, which was out of reach, unless incurring in a global atomic war. After Brezhev, came Mihail Gorbachev, a dreamer, to say the least, who gave away his allies without warranties, adopted neo-liberalism and sold Russian state assets at degraded prices to Wall Street’s straw men.

In England and America, politics are ruled by financial interests since the eighteenth century and Central Bank functions have been assumed by consortiums of private banks. In Britain, the Bank of England assumed them since 1844 (Bank Charter Act). In Washington, a group of big private banks became the Federal Reserve and usurped those functions from the Treasury, in 1913. In both countries economic policies are dictated by "Lobbies"; among them excels the arms industry, which guides defence policy toward ever-increasing military spending. Both sectors – finance and weapons – loot resources from the economy to maintain two fantasy worlds: one of fabulous virtual fortunes and one of imaginary threats.

During both post-wars, the presence of Marxism-Leninism as a ruling ideology helped to raise wages and institutionalize social protection of workers, mainly in Europe, where the Soviet Union was close and had powerful communist parties. The potential threat promoted a policy towards a reconciliation of worker's rights with business interests. The disappearance of the Soviet bloc unleashed greedy hallucinations that led to a socio economic cliff. The tale that total freedom for personal greed leads to collective prosperity proved false.

The real economyeroded and is now on life support, since 2008. It is a schizophrenic case: the people (99%) in the real goods and services economy lives a recession, but the owners of the finance and arms industries receive juicy bonuses and dividends. It happens that public debt was created to give money to the banks ("quantitative easing") to re-inflate stock markets and the payment was charged to taxpayers. It might have been a new beginning if the practices and policies had changed, but they keep unchanged and lead inexorably to a terminal crisis.

There is not yet public awareness that there is a massive failure of the political and economic system imposed by Wall Street and the City in London, since their victory in 1945. Symptoms of collapse are clear and the gravest one concerns labor, because wages maintain consumption levels. In the U.S., official unemployment is 8%, but their statistics hide much data[1] and unemployment stands around 18%, and growing. In Britain the official figure is 8.4%, but excludes 3 million underemployed, with a few hours a week and 4 million of the so called "precariat", people in casual self-employment, which means rather self-unemployed[2].

Since 2008, the bank ransom cost more than $19 trillion – more than one third of US GDP – which was invested in new gambles of the financial sector and not in mobilizing the economy. Households lost $ 1.1 trillion in value, plus billions lost in investments and pension funds. Now, families that were middle class take soup kitchen's charity. Those innocent pay for the absurd risks incurred by greedy bankers and for the follies of the military-industrial complex.

Socio-economic Ethics

The social responsibility of the economy is an ethical issue that separated Adam Smith and David Ricardo. Smith speaks of "excessive profit” as contrary to the general well being and a parasite; Ricardo sees it as an economic goal and that is also the approach of current neo-liberalism, it is what is now taught in business schools as economics. The anthropologist Gregory Bateson (Mind and Nature) said that "the ethics of optima and the ethics of maxima are totally different ethical systems”. Ethics of optima emphasizes quality and looks for satisfaction. The ethics of maxima are addictive and have only one rule: more is better.

Excesses are always toxic and it iswhat killed the U.S. economy and the present economic system. "Maximization of a single variable – Bateson tells us – typically ends in pathology." A healthy economy keeps a balance in the prosperity of the various sectors; where growth is favoured for only for a few sectors, there is a parasitic situation. Such is the case of the financial sector and the arms industry, which on one side request socioeconomic austerity while on the other side engage in wasteful and totally unnecessary wars.

As it agonizes, the system dismantles the European welfare state. The bankers need more money for their gambles, so they impose their own people in government; jobs are eliminated, employment becomes precarious, public services are privatized. As Boaventura de Sousa says, in History of Austerity: "The goal is to return to class politics pure and hard, that is, to the nineteenth century," to Ricardian liberalism, to the England described by Charles Dickens.

There are other doctrines

During the Nineteenth century, economics was conceived as a science whose primary goal was not the earnings of workers but those of the capital invested... and even then, only that of the few. But there were also those who had the worker's interest at heart; their thoughts were applied later, although timidly, in Western Europe before the Soviet Union collapse. Most of them are now ignored and their works are hard to find in university libraries. Their goal was national prosperity, rather than individual or corporate gain; an objectionable criteria for companies that fund academic activity and whose economic vision focuses on quarterly earnings.

The first of them was from Geneva, Jean Charles de Sismondi, who published "New Principles of Political Economy" in 1818. He minted there the term proletariat – which later Marx used – to designate those whose role was to guarantee labour with their offspring. He criticized Ricardo and noted that profits at the expense of wages is foolish, because good salaries are necessary to maintain market consumption; he was also the first to demand government intervention to protect workers from capitalist abuse and also the first to talk about class struggle[3].

Sismondi predicted the crisis afflicting the United States and other countries today, due to complicit governments. He said that overproduction leads to imperialism and to squeezing consumers through debt on future wages. Now it is called "supply side economics" and should be called Debt Economy. Sismondi denounced overproduction also because it distances the utility value of products from their exchange value, promoting unnecessary consumption on credit and debt bondage. It has happened in England and the United States since the Nineteenth century. Then it was credit at the employer’s store, now it is credit cards. This distinctive feature is described in "The Iron Heel" (1906), by Jack London.

Since then, the tendency to excesses of capitalism and the role of government to correct them have inspired other proposals. They can be classified in two basic theses.

One group is constituted by Karl Marx and his followers, who believe capitalism to be irredeemable and immersed in a fatal dialectic process that leads to its own violent destruction, until its replacement by a society without private property.

I think that Marx and his followers are utopian when they base their violent thesis in proletarian solidarity. Solidarity is rather precarious among people struggling to survive and even more so when they are denied the security of having their own home. Class solidarity exists, but between the very rich. Nonetheless, Marxism is valid as a method of socioeconomic study and has basic inputs for a proposal to replace pure Ricardism or Neo-Liberalism.

The other group thinks that capitalism can be managed with control policies to the benefit of society. Besides Sismondi, we can include Friedrich List, Werner Sombart, Max Weber, Vilfredo Pareto, John Maynard Keynes and in a reverse way, Deng Xiaoping in China.

We believe this second group is more realistic and consistent with what is now a postulate of political science, as mentioned by Sismondi, Iturbide, Sarmiento and others: In Statematters,jumps are ephemeral; progress is made by evolution, as in nature, and institutions that last evolve according to the circumstances, the culture and the ideas of their citizens.

The influence of the authors in this group is important: List promoted the industrialization of Germany, Keynes developed the economic importance of wages, Max Weber, Vilfredo Pareto are still orienting social economics. Sombart coined the term "capitalism" (Marx does not use it) and the concept of creative destruction, later used by Joseph Schumpeter. Sombart's main work[4] is not available in English because Princeton University has an exclusive right and has not translated it.

There are other important authors that we could study: Vasili Leontief, Nicolai Kondratieff, Joseph Schumpeter, Jon Elster, John Roemer and Carlota Perez, a Venezuelan whose book "Technological Revolutions and Financial Capital"[5] covers 250 years of history and points out that changes and technical revolutions have a remarkable regularity and force the redesign of social and political institutions. We are experiencing one of those moments.

Geneva, 01/23/2013

- Umberto Mazzei has a PhD in political science from the University of Florence. He has taught international economics at universities in Colombia, Venezuela and Guatemala. He is Director of the Institute of International Economic Relations in Geneva.

[1]Individuals collecting unemployment insurance are officially unemployed, but when after a few months support stops they drop out of unemployed statistics even though they are still out of work. There are also millions of Americans who are underemployed, with only a few hours per week, but are included among the employed.

[2]The Guardian, John Philipott: We need employment statistics that confront political spin. 16 January 2013.